Sheep

Monday, June 30, 2014

What does spring hold for lamb markets?

Key points

East and west lamb markets should continue to be well supported until the end of July, at least.

WATLI displays a more intense seasonal pattern, with prices bottoming 23% below June levels by October.

Spring price downside should be somewhere around average this year, 10-15% for the ESTLI and 20-30% for the WATLI.

Target low for the ESTLI this spring around 470-520¢/kg cwt in November and 435-475¢/kg cwt for the WATLI.

Eastern states lamb markets have moved sideways at historically high levels for over three months. After lagging behind, WA markets have posted a stellar recovery since May and are now the best quoted market in the country. While the short term outlook remains very positive for both markets, what should be expected in spring?

As mentioned in earlier reports, eastern lamb markets should find some support at current levels until late July or even see some upside in the event that seasonal conditions improve. As for WA, there also seem to be limited downside until the start of August as a result of the seasonal tightening in winter supply. But after that, what will spring bring to lamb markets?

Figure 1 shows the historical price movements for the Eastern States Trade Lamb Indicator (ESTLI) from June until December. The green shaded area represents 70% of the range in movement seen over the last 14 years. Although this range is relatively wide (up to 30% variance in price), it shows a very clear price trend for spring.

On average, the ESTLI moves another 5% higher in July and then maintains these levels until September. After that, the indicator really starts to drift lower to reach the bottom in November, with prices 11% below June levels. In 2013, the surge in lamb throughput started to place stronger downside pressure on prices in August to see the ESTLI plunging 17% from June levels by November.

Figure 2 shows the same seasonal price movements for the Western Australian Trade Lamb Indicator (WATLI). Although similar in nature, the seasonal trend seen in WA is much more distinct than on the east coast. Not only the spring price downside is more evident, but the range where prices ought to move is much narrower. This clear distinction can be partially explained by to the wider geographic coverage of both indicators (WA vs NSW/VIC/SA).

As with the ESTLI, the WATLI generally lifts 5% in July before easing back to June levels in August. The spring supply flush really kicks in from September to see prices easing 23%, on average, by October. Last year, lamb markets bucked the trend a bit and fell only 10% by October. However, it’s worth remembering that last June prices were roughly 50% lower than they are today and WA was already tracking at a fair discount to the east.

What does this mean?

Before we delve into the price forecasts there are two key things to bear in mind this year.

Firstly, lamb supply in 2014/15 is expected to fall 5-10% below 2013/14 levels suggesting we should have a milder price downside this spring. However, given the currently high prices, percentage price falls slightly below average are still quite plausible. For the ESTLI, that would be around 15% from current levels and the WATLI around 25-30%.

With that in mind, we believe the ESTLI should bottom somewhere around 470-520¢/kg cwt in November (figure 3). As for the WATLI, prices should bottom in October somewhere between 435¢ and 475¢/kg cwt. Yet, these would still be around 20-30% and 25-35% above the spring lows seen in 2013 for the ESTLI and WATLI, respectively.

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